Monday, 1 May 2017

Occupational licensing doesn't protect who you think it does

Occupational licensing doesn't protect who you think it does. Rather than protecting consumers, its more about protectionism for those being licensed — and ideal way to bar competitors and minimize the dangers, to incumbents, of the new, novel and innovative.

In fact, argues Jason Sorens in this guest post, Licensing tradesmen and professionals is about little more than consumer exploitation, .

Do occupational licensing laws protect you from unscrupulous and unqualified practitioners? Or do they just protect the current practitioners against new competition?

These laws ban ordinary people from practicing a certain trade or profession — be it dentistry or hair-styling — until they have paid fees, undergone a certain number of hours of schooling, and usually passed certain examinations in order to get a license.

The proponents of such licensing laws generally claim that they help keep consumers like you safe from harm and fraud.

But let’s take a look at the evidence for ourselves.

Licensing’s Effect on Quality, Pricing, and Availability

We can examine the effects of occupational licensing on practitioner quality in part by looking at complaints to state governments. University of Minnesota economist Morris Kleiner has found in his book Licensing Occupations and a series of related papers that states that license practitioners see no fewer complaints than states that do not license them.[1]

In terms of pricing, an Obama White House report from 2015 noted that “the evidence on licensing’s effects on prices is unequivocal: many studies find that more restrictive licensing laws lead to higher prices for consumers.”

Furthermore, occupational licensing reduces the supply of new entrants into a profession. A study of Vietnamese manicurists in the American Economic Review found that lengthier training requirements reduced the number of practitioners significantly.

Occupational licensing also reduces low-income entrepreneurship activity significantly. Low-income workers often find it hard to pay for training, particularly when they have to go to school for a year or more to achieve certification for skills they already possess, over which time they still have to support themselves somehow.

Because licensing requirements vary by country and by state, and many do not automatically recognise those of other territories, licensing also prevents practitioners from moving easily or practicing across state lines.[2]

As Econ 101 tells us, that reduction in new entrants raises the wages of existing practitioners at the expense of increased prices to consumers—whom these laws are allegedly intended to protect.

How Licensing Laws Happen

You could call into question a lot of the prior evidence, and it’s not hard to find a few studies that find no effects of licensing (this isn’t too surprising, given the difficulty of measuring these effects). But what makes the incumbent-protection theory of licensing most plausible is actually the politics of the licensing process.

1. Legislators Only Hear from Lobbyists
Who proposes new licenses? It’s almost always a practitioner group that lobbies the state legislature. Very rarely do you see a new licensing proposal emerge because of consumer outcry for it. When state legislators hear testimony on a licensing bill, only practitioners show up to testify, and they are almost always unanimously in favor of licensing.

Consumers don’t show up, and neither do people who might want to enter the profession someday. So it would be really surprising if state legislatures didn’t overregulate occupational entry when the information and pressure they are getting is always so skewed.

2. Licensing Always Grandfathers Existing Practitioners
If licensing were about protecting the public, then licensing requirements would be applied equally to all practitioners. But that’s not what state governments do. Invariably, they exempt incumbents (known as “grandfathering”)and apply the new requirements only to future practitioners. This discrimination makes sense only if you want to restrict supply in order to help incumbents, not if you want to protect the consumer.

3. Strong Sunrise Review Helps
Some places (but very few) have strong “sunrise review” provisions. These require all new licensing proposals to be reviewed by an executive department before the legislature can vote on them, and specify that licensing is only justifiable if it is the least restrictive means necessary to achieve the objective of protecting public health and safety. Colorado and Vermont are two American states that seem to have strong procedures. And these two states have much less licensing than other states.

If review by government licensing bureaucrats (who are hardly free-market ideologues) results in less actual licensing, that fact suggests that the additional licensing seen in other states is probably not justified by consumer protection.

Certification Is Rare

If you want to protect the consumer, so-called ‘certification' almost always makes more sense than licensing. Certification — or “title regulation” —merely applies penalties to illegitimately calling yourself a certified practitioner if you haven’t met the criteria for certification. Laws against calling yourself a registered architect for instance wouldn’t forbid you from practicing architecture if you were unregistered, simply from claiming to be registered if you weren't. (And if registered architects are perceived to be superior, then consumers won’t be fooled by fellows fraudulently preteneding to be so.)

In essence, certification lets consumers decide if they want to get services from a certified or an uncertified practitioner, alllowing them to be the purveyors of quality.

But certification is in fact rare. Where it exists, governments usually end up replacing it with licensing. Why? Because certification doesn’t restrict entry — it doesn’t serve the interests of incumbents the way licensing does, and it’s incumbents who pay the lobbyists.

To be sure, government certification is hardly necessary today, especially as it can be easily achieved by private sector certification done by experts such as Underwriters Laboratory, voluntary organisations like Master Builders or Certified Builders, or by the public at review aggregation services like Yelp and Trip Advisor and in sharing apps like Uber, Lyft, and AirBnB.

The Upshot

The combination of all these facts strongly suggests that the motivation and function of occupational licensing is not to protect consumers like you and me, but to exploit them, and to protect existing practitioners from new competition.

Where there really a grave risk to public health and safety from incompetent practice in a certain industry, there is a simple and effective solution: bonding. Require a prospective practitioner to put up a bond or prove liability insurance coverage sufficient to cover the costs of a reasonable lawsuit judgment. And require both incumbents and new entrants to meet the requirement.


Jason Sorens is a lecturer in the Government Department at Dartmouth College and received his Ph.D. in political science from Yale University in 2003. He is also vice president of the Free State Project.
His post has appeared previously at Learn Liberty and FEE.


[1] Note that this research can look only at occupations that are licensed in some states but not others.

[2] From the Obama Administration report: “Forthcoming analysis of five licensed occupations finds that, controlling for observable differences that could affect migration rates, individuals in three of these occupations have lower interstate migration rates than their peers in other occupations, while their intrastate migration rates are similar. This is to be expected if a State-based licensure system depressed mobility” (15).

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